Housing market on the rise, but tax reform may derail it

Housing market on the rise, but tax reform may derail it
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Homebuyers are starting to return after a summer slump and two hurricanes. October existing-home sales in Houston rose 7 percent, while many of the Florida markets also moved forward.

If not for the hurricanes, the housing market would have notched a solid gain for the third consecutive year. In fact, before the storms, home sales were higher every single month in 2017 compared to the prior year.


After the soft figures of 5.35 million sales (on a seasonally-adjusted, annualized basis) and 5.37 million in August and September, respectively, sales rebounded in October, hitting 5.48 million. All four major regions of the country showed gains, implying that continuing low mortgage rates and job gains across most of the country are boosting housing demand.


What is lacking, however, are properties for sale. At the end of October, there were 1.8 million homes on the market for sale, down 10.4 percent from one year ago and the lowest October inventory figure since we began tracking the data in 1999.

Considering that the U.S. population has grown by 45 million people since then, the inventory shortage is even more striking. This ongoing inventory shortage is the reason for the consistently fast home-price growth, which rose 5.5 percent in October.

From the lows in 2011, the median home price has increased from $160,800 to the current $247,000: a nice gain of over $80,000 for the typical home in the U.S.

The key to a healthier sales pace is for homebuilders to expand construction in a robust manner. Housing starts of 1.29 million units in October are the second-best monthly activity in nearly a decade, which is encouraging. More will surely be built based on permit data and job openings in the construction industry.

Increased home construction will not only balance out supply and demand in the housing market and make housing affordability more manageable, but should also help boost GDP growth in 2018.

Based on momentum and the underlying factors in the job market, home sales should easily advance 5 percent next year. The greater the inventory growth, the greater the gains in home sales. More supply will also tame the home price growth to around 3-4 percent.

However, this positive forecast comes with one big caveat: Next year’s outcome could be drastically different if the tax reform bill, in its current form, becomes law. Given the current details of the Senate and House bills, the tax incentive to buy a home largely goes away.

Mortgage interest deduction becomes less useful because the higher standard deduction and property tax can no longer be deducted (in the Senate bill). Moreover, the bill will punish those who move. To get the capital gains exemption, homeowners will now need to live in their homes for five out of eight years rather than two out of five years.

Our data from recent home sellers show that about a quarter of people lived less than five years in their home before listing it. In other words, you need to stay put or you will be taxed. That is very counter to the American belief in mobility and advancement in a dynamic economy.

One less-discussed item of the tax reform is the budget deficit. The blowout of $1.5 trillion in additional government borrowing as stated in the tax reform bill will cause mortgage rates to rise.

So, in addition to the economic factors and monetary policy changes, the excessive government borrowing — as with any increase in private borrowing — will nudge the borrowing costs higher than they otherwise would be.

That will hurt future generations and the American dream of homeownership.

Lawrence Yun is the chief economist and senior vice president of research for the National Association of Realtors.